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251Ch4lecture5

251Ch4lecture5 - Q d P ε d and Revenue Summary • When...

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9/6/2011 1 1 Chapter 4: Elasticity Lecture 5: Price elasticity of demand and revenue ε d < 1 and Revenue • Revenue = P x Q d • ↑ P → Revenue? • ε d < 1 → < 1 → < • Small Q d change relative to change in P • ↑ P → small ↓ Q d → ↑ Revenue • ↓ P → small ↑ Q d → ↓ Revenue %Q % d P %Q d P % ε d > 1 and Revenue • ε d > 1 → > • ↑ P → big ↓ Q d → ↓ Revenue • ↓ P → big ↑ Q d → ↑ Revenue
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Unformatted text preview: % Q d P % ε d and Revenue Summary • When demand is inelastic, revenue follows price. • When demand is elastic, revenue follows quantity demanded Graph of revenue Elasticity and revenue graph • Raising price reduces revenue because quantity falls, but • Raising price raises revenue because price is higher • Net result depends on price elasticity of demand...
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